Australian dollar bounces back on CPI figures

Mark Mulligan

Consumer prices rose by 0.5 per cent in the June quarter, broadly in line with market expectations, as higher prices for health services, dwellings and tobacco offset falls for travel, petrol and telecoms equipment and services.

After trading down about 0.1 per cent, to US93.84 cents, throughout the morning, the Australian dollar bounced back to US94.28 cents on the release.

The cost of health insurance helped push up inflation in the second quarter.

The quarterly growth, compared with 0.6 per cent in the preceding three months, equates to an annual rate of 3 per cent, up 0.1 percentage point at the end of the March quarter.

Despite rising consumer prices, the Reserve Bank of Australia is likely to remain sanguine about current inflation, which at the core measure rose 0.8 per cent on the quarter and 2.9 per cent year on year. Although higher than expected, this remains inside the RBA’s target band for inflation of between 2 and 3 per cent.

The weighted median, another core measure, came in at 0.6 per for the quarter and 2.7 per cent for the year, in line with expectations.

Economists had forecast a headline figure of 3 per cent and 2.7 per cent for the underlying rate.

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"The Reserve Bank is probably happy to leave rates where they are for quite a while yet, and market pricing for some chance of a rate cut looks misplaced," said Michael Blythe, chief economist at Commonwealth Bank.

"The underlying numbers look a fraction higher - they're a warning sign that the inflation backdrop is not as benign as markets want to price in at the moment,"

Analysts have also pointed to a moderation in price pressures in the second half because of sluggish consumer spending, wage restraint and job market weakness.

After trading down about 0.1 per cent, to US93.84 cents, throughout the morning, the Australian dollar bounced back to US94.28 cents on the release.

In releasing the quarterly Consumer Price Index data, the Australian Bureau of Statistics said the most significant price rises were for medical and hospital services, up 4.6 per cent; new dwelling purchases by owner-occupiers, up 1.6 per cent; and tobacco, ahead 3.1 per cent.

The most significant offsetting price falls for the quarter were for domestic holidays travel and accommodation, which was down 3.8 per cent; automotive fuel, off 2.7 per cent; and telecoms equipment and services, which was down 1.6 per cent.

“The RBA is going to have to increase their core inflation forecast in the statement of monetary policy,” JP Morgan economist Tom Kennedy said.

“We think that the speculation regarding near-term rate cut that we've seen over the past four to six weeks is likely to be dialed back to a certain extent."